US Manufacturing on the Rise

Well, all that back and forth between rally and sell-off for the currencies came to an abrupt halt yesterday, when the dollar bulls went on a rampage. There was some very strong economic data to help the move, but the real thing that brought the currencies to their knees was the stock sell-off of 185 points.

Get this… We all know that the risk assets of stocks, commodities, and currencies have all been tied together for some time now. So I was surprised to see a story titled: “Currency Markets Taken For a Ride by Stocks.” Hmmm, maybe this person just woke up from a 9-month coma, eh? Anyway, that doesn’t matter; it’s just another opinion that coincides with mine!

I had a reader send me a note yesterday asking me to explain my lingo when talking about “handles”… OK… A quick run-though of this… It’s an old term that I carried over from bond trading to currencies. So… A “handle” is the whole number. So, if Norwegian krone (NOK) is trading at 6.0350, “6” is the “handle”… Hope that helps!

OK… Back to currencies… One has to wonder what’s going on these days… I mean for over nine months, whenever there was strong data in the US, the dollar would get sold. But now, that’s all changed… And since when does a rise in manufacturing lead to a 185-point stock sell-off? It’s crazy out there, folks! There’s nothing that’s trading on fundamentals.

The strong data I’m talking about is the ISM (Manufacturing) Index that printed for August yesterday… For the first time in 19 months, the index rose above the 50 level to 52.9! That’s a good performance for the manufacturing sector, and one that will probably bring economists, and politicians to claim that the recession is over. Well, that may be… FOR NOW! Double dipping… It’s in our future; I can feel it! And don’t forget what I explained to you yesterday regarding the weaker dollar playing a big part in Manufacturing’s rise.

A reader that happens to be a manufacturer sent me a note… “Regarding the uptick in the manufacturing index: from where I’m sitting I don’t see it as an increase in demand for our products, but rather a re-building of inventories from an oversold position. We’ve seen a bounce off the bottom in May that has been carried through this month but it appears to be leveling off.”

So… Once again, this is the kind of thing I believe to be “real economics”… Real stuff! Not the surveys, not the hedonic adjustments, not the cooking of books… Real Stuff!

And, before I go on to other things… I normally look at the employment component of the ISM to give me an indication of what the Jobs Jamboree will show, which prints on Friday this week. The ISM employment component showed a job loss of 225,000… So, we’re still losing jobs.

OK, back at the currencies ranch… The dollar is beating up on the currencies, but what’s that I see? Ahhh… It’s the Aussie dollar (AUD) mounting a rally in the face of this dollar strength! Let’s go to the tape to find out what’s going on there…

Second quarter GDP in Australia printed stronger than forecast at +0.6%, (versus +0.3% forecast) and stronger than the first quarter print of +0.4%. This uptick has really brought the rate hike campers back out into the streets. Recall that a couple of months ago, I wrote about how Australia might end up being the first to raise rates after the financial meltdown of 2008… (It’s neck and neck between Australia and Norway)… Then came the thought that the rate hike might come in the first quarter of 2010… But there are those now who are thinking that the first rate hike could come this year! October’s Reserve Bank of Australia meeting is now being targeted… Put this in you calendar to come back to…

Speaking of Norway… The rate hike campers here had to take a step back yesterday after Norway’s PMI (Manufacturing Index) was a disappointing print. Norwegian PMI, which just a month ago was knocking on the 50 number (at 49.7) fell back to 42.3 in August… UGH! So, the Norwegian krone, which had just Monday traded with a 5 handle, got smoked on this print…. But I don’t think this is something that we should get our undies in a bunch about. This is just one print… And probably only delays Norway’s rate hike by a month or two.

Recall on Monday this week I told you that we would have all kinds o’ data this week, and all over the world. Well… In keeping with that… China too, printed their Manufacturing Index report last night. The state-sanctioned China Federation of Logistics and Purchasing said its purchasing managers index (manufacturing) rose to 54 from July’s 53.3 on a 100-point scale where numbers above 50 show activity expanding. It marked the sixth month of expansion.

So… Just like I told you a couple of months ago… China was going to be the first to exit the economic mess/slowdown/recession/depression… This marks six consecutive months of prints above 50.

I watched gold get sold yesterday too, and wondered about the price of gold and how it seemed to be stuck in the $950 range. I did see recently where the central banks around the world had signed a new agreement on the amount of gold that they sell… The good news for gold was that the central bankers agreed on a smaller amount as their maximum amount of gold that can be sold each year.

Imagine, if you will, where the price of gold would be today, if those central banks hadn’t dumped gold on the markets for the last nine years? The fact that gold has risen from $250 to $950, in the face of these central bank sales is amazing! And now… The amount the central banks can dump on the markets each year is smaller… What do you think that means for the price of gold? I know what I think it means!

Talk about getting “dumped”… That’s what happened to the Brazilian real (BRL), yesterday… Yes, most of the currencies sold off… But the real was really sold off! That makes some sense in that it had out performed most currencies this year, and therefore, the selling – or profit taking – would be on a larger scale… I think this selling was overdone, though, and I would look for the real to make an attempt to come back today.

Today, the data cupboard here in the US has the ADP employment report, which is kind of a wild hair report that hardly ever gives a good indication of what to expect in the Jobs Jamboree… But just for the record, the forecast for the ADP report is for job losses of 250,000… Which is close enough for government work to the ISM employment component, I talked about above.

We’ll also see the stupid productivity report for the second quarter… I’ve explained why I think this report is stupid in the past, so I won’t spend a lot of time on that.

Factory orders is the only “real” piece of data that I care to look at this morning… July’s factory orders will print and most likely show an increase of 2.2%.

Then later this afternoon, the minutes of the latest FOMC meeting (8/12) will print. Hmmm… You never know what these minutes might reveal, I’ve always maintained that if they were the “real” minutes we would see things like… B-10… By Joe, You’ve sunk my Battleship! HA!

And on that note… I will sign off for the day.

The Daily Reckoning